Perhaps the Warren Buffett way really is better.
That’s the conclusion you could draw given the unexpected recent gains in one of Berkshire Hathaway‘s ( BRK.A -1.05% ) ( BRK.B -0.74% ) more uninteresting holdings, anyway. American Express ( AXP 2.01% ) shares are up almost 30% in the past 12 months, priced within sight of new 52-week highs, while the S&P 500 ( ^GSPC 1.17% ) is up a more modest 11% in the same timeframe. Better still, American Express is up a hefty 137% for the past five years, surprising nearly everyone with sizable gains from a seemingly stodgy company.
What did Buffett and his acolytes know that lots of other people didn’t?
American Express provides real value
American Express is not technically a credit card company. Rather, it provides charge cards, or a means of making purchases without the use of cash with the expectation that the charge will be paid in full at the end of the billing period. The company handles a few billion consumer transactions every year, each one of which generates a few cents’ worth of revenue for every dollar spent. American Express collected $25.7 billion of this sort of revenue in 2021.
However, for all intents and purposes American Express is a credit card company, and more importantly, a credit card lender. AmEx generated $8.8 billion worth of interest-based revenue last year, which only cost it $1.3 billion. All told, the company netted $7.7 billion in interest revenue in 2021.
The numbers, however, still don’t answer the question about why the shares of this organization operating in the highly competitive credit card industry are doing so well.
The differentiator is the perks-and-benefits ecosystem American Express has built for cardholders.
Most credit card issuers tack on niceties like cash-back rewards, points toward travel miles, and the like to their service. Few of them do it as well as AmEx does, though. Points are awarded for everyday things like shopping for groceries and eating at restaurants, and cash is given back for purchases made at department stores. Certain cards even offer credit toward ride-hailing services and free checked bags when flying.
And these aren’t insignificant rewards. For instance, holders of American Express’s Blue Cash Preferred card will get back 6% on as much as $6,000 of their supermarket purchases in the span of one year. The perks are so sweet, in fact, that many consumers are willing to pay sizable annual fees just to use American Express cards. Of AmEx’s 2021 revenue of $42.4 billion, $5.2 billion of it came from membership fees alone. That’s a high-margin $5.2 billion worth of sales, too. Costs linked to managing its rewards programs, member services, advertising, and marketing are covered by the more typical credit card revenue sources like transaction fees and interest charges.
In simpler terms, American Express is very, very good at adding real value for its cardholders.
The proverbial proof of the pudding lies in the numbers. Last year’s 17% uptick in net revenue isn’t just a post-pandemic fluke. At the company’s recent Investor Day event, American Express said it’s targeting revenue growth of between 18% and 20% this year, and aims to generate annual revenue growth of more than 10% in 2024 and beyond. Earnings growth should roll in somewhere in the mid-teens at that sales growth pace. Given everything we know about the company, those results certainly seem achievable.
And perhaps here’s the part Buffett and Berkshire’s stock-pickers like best: Past and projected profit growth is supporting similar dividend growth. American Express just upped its 2022 quarterly dividend payment (again) to $0.52 per share, up 20% from last year’s quarterly payout, and a return to the rate of increase before the pandemic took hold.
Buffett’s patience is paying off
A perfect stock? No, there’s no such thing. Every stock has risk, and since people run companies, mistakes happen and inefficiencies exist. Then there are the unexpected hurdles that up-end earnings, like pandemics and recessions. Geopolitical tensions don’t help matters either.
American Express, however, is one of those solid stocks that’s easily overlooked while hunting for more exciting investment prospects. That’s a big mistake…a mistake that Warren Buffett didn’t make. He’s held a stake in the company for a couple of decades now, and rightly so. You’d do well to follow his lead.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.